To achieve its price stability objective, and given that key interest rates are close to the lower bound on nominal rates (see What is the effective lower bound on interest rates?), since 2008 the European Central Bank (ECB) has introduced a series of new monetary policy instruments. These measures were originally known as “non-standard measures”. However, over time they have become part of the main central banks’ conventional monetary policy “toolbox”.
Although these non-standard measures were designed to be temporary in nature and complementary to the ECB’s key interest rates, most remain in use to this day. Given the changes that have taken place in recent years, particularly the decline in the natural rate of interest, the ECB has included these new instruments in its toolbox in order to maintain price stability. The ECB Governing Council will continue to respond flexibly to new challenges as they arise and consider, if needed, new policy instruments in the pursuit of its price stability target.
Prior to the global financial crisis, the ECB offered banks a pre-set amount of credit through tender procedures in exchange for collateral. However, after the crisis hit in 2008 it began to provide banks with credit at a fixed interest rate. Under this approach, known as fixed rate full allotment (FRFA), liquidity provision was very high. The list of eligible collateral was also expanded (see What are collateral assets?).
Later, during the sovereign debt crisis, the ECB implemented non-standard measures to reduce the financing disparities between households and firms in different euro area countries. In May 2010, the ECB launched the Securities Market Programme (SMP), under which Eurosystem central banks began buying up debt securities to ensure liquidity in certain market segments. In addition, new longer-term refinancing operations with a maturity of 36 months were announced in late 2011.
In September 2012, the SMP was replaced by the Outright Monetary Transactions (OMT) programme, with the existing securities in the SMP portfolio being held to maturity. Under the OMT programme, sovereign bonds with a maturity of between one and three years could be purchased, provided certain conditions were met, to smooth the transmission of monetary policy decisions (for more information, see press release Technical features of Outright Monetary Transactions
, of 6 September 2012).
In 2014, in view of the deflationary risks in the euro area economy and interest rates being close to their effective lower bound, the ECB implemented a raft of non-standard measures, including targeted longer-term refinancing operations (TLTROs), a broad asset purchase programme and forward guidance. The ECB also introduced a negative interest rate policy (NIRP), thus demonstrating that the lower bound for interest rates was not zero (as traditionally thought), but negative. Consequently, on 11 June 2014 the ECB lowered the deposit facility rate by 10 basis points to -0.10%, after two years at 0%. Further slight cuts were subsequently made, keeping the deposit facility rate at moderately negative levels.
More recently, as a consequence of the COVID-19 crisis, the ECB Governing Council launched a pandemic emergency purchase programme (PEPP) to counter the risks posed by this crisis to the euro area monetary policy transmission mechanism. The Governing Council also announced several adjustments to existing non-standard measures (for more details, see What role has the ECB played in the COVID-19 crisis?).
In addition, to support the effective transmission of its monetary policy across all euro area countries, the Governing Council approved a Transmission Protection Instrument (TPI) which could be activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area (see press release, 21 July 2022).